Overview
Title
Resolution Planning
Agencies
ELI5 AI
Fannie Mae and Freddie Mac need to make plans for when things go wrong, like a backup plan if they're in big trouble, to help keep everything running smoothly and make sure everyone is treated fairly. The people in charge want to hear what others think about this idea by March 9, 2021.
Summary AI
The Federal Housing Finance Agency (FHFA) is proposing a rule requiring Fannie Mae and Freddie Mac to create resolution plans to ensure their smooth operation in case FHFA is appointed as a receiver. This rule is part of developing a strong regulatory framework for these enterprises as they prepare to exit conservatorship. The intended resolution planning aims to minimize market disruptions, ensure fair loss distribution among investors, and enhance market discipline. The FHFA invites public comments on this rule by March 9, 2021.
Abstract
The Federal Housing Finance Agency (FHFA) is seeking comment on a proposed rule that would require Fannie Mae and Freddie Mac (the Enterprises) to develop plans to facilitate their rapid and orderly resolution in the event FHFA is appointed receiver. A resolution planning rule is an important part of FHFA's on-going effort to develop a robust prudential regulatory framework for the Enterprises, including capital, liquidity, and stress testing requirements, as well as enhanced oversight, which will be critical to FHFA supervision of the Enterprises after they exit the conservatorships. In addition, a resolution plan as proposed to be required would support FHFA if appointed as receiver to, among other things, minimize disruption in the national housing finance markets by providing for the continued operation of an Enterprise's core business lines by a limited-life regulated entity (LLRE); ensure that investors in mortgage-backed securities guaranteed by the Enterprises and in Enterprise unsecured debt bear losses in accordance with the priority of payments set out in the Safety and Soundness Act while minimizing unnecessary losses and costs to these investors; and, help foster market discipline in part through FHFA publication of "public" sections of Enterprise resolution plans.
Keywords AI
Sources
AnalysisAI
The Federal Housing Finance Agency (FHFA) is proposing a new rule that would require Fannie Mae and Freddie Mac, two of the nation’s largest housing finance agencies, to develop plans for how they will be managed in case of a financial crisis where the FHFA is appointed as a receiver. This rule is part of an overarching effort to create a strong regulatory framework for these enterprises, especially as they prepare to transition out of federal conservatorship. The aim is to minimize disruptions in the housing market, ensure that investors experience fair treatment if losses occur, and reinforce discipline in the market.
Significant Issues and Concerns
The document is notably detailed and lengthy, which may pose challenges for stakeholders affected by the proposed rule in terms of understanding its implications fully. The rule introduces complex requirements, such as defining what constitutes a "credible" resolution plan. This complexity implies that specialized legal or financial expertise may be necessary to interpret these new mandates effectively.
Additionally, the rule involves several technical financial terms and legal references, such as the 'DFA section 165 rule' and 'FDIC IDI rule. These terms can be daunting for individuals not familiar with financial regulations. Moreover, the expectation that Fannie Mae and Freddie Mac assume no extraordinary assistance will come from the U.S. government might lead to conservative planning, potentially disrupting normal market activities.
The publication of certain key sections of the resolution plan is also under consideration, raising concerns about how transparency can be balanced with confidentiality. There is a risk that sharing too much could reveal sensitive information, but sharing too little might not provide the intended market discipline.
Public and Stakeholder Impact
The rule has the potential to impact the public broadly by stabilizing the housing finance market during times of financial distress. It aims to prevent the kind of market chaos that occurred during the 2007-2008 financial crisis. However, the intricacies involved and the need for compliance could mean significant costs and resource commitments for the enterprises.
For the enterprises concerned, the process outlined may appear burdensome and complex. Identification of core business lines, creating resolution plans, and updating interim plans could divert focus and resources from daily operations, particularly for smaller entities.
There is also concern about the fairness and transparency of the rule since discretion is given to FHFA in interpreting and applying several processes. This could lead to inconsistent application of the rules, potentially affecting their effectiveness.
Furthermore, the overlap with other regulatory frameworks remains an unresolved issue, possibly leading to conflicting requirements or redundancies, increasing the complexity for affected entities who may already be dealing with numerous compliance obligations.
Conclusion
The proposed rule from the FHFA represents a significant step towards ensuring financial stability within the housing market in times of crisis. While it aims to protect the market and investors, it presents challenges in terms of understanding, execution, and compliance for affected enterprises. As such, stakeholders, especially smaller financial entities, will need to navigate these requirements carefully to align their operations with the new expectations, potentially incurring higher administrative costs and operational shifts.
Financial Assessment
Commentary on Financial References in Federal Register Document
The document outlines proposed rules by the Federal Housing Finance Agency (FHFA) requiring Fannie Mae and Freddie Mac to develop resolution plans to ensure their orderly dissolution if necessary. Within this context, several financial references illustrate the scale and nature of the Enterprises' operations and their reliance on government support.
Treasury Support
One significant financial reference involves the $187 billion dollars in Treasury support required by Fannie Mae and Freddie Mac from 2008 to 2012. This substantial funding underscores the financial struggles the Enterprises faced during the 2007-2008 financial crisis and highlights the government's role in stabilizing these institutions. This level of support reflects the systemic importance of Fannie Mae and Freddie Mac in maintaining the stability of the housing finance market.
Enterprises’ Assets and Market Size
The document notes that the combined single-family book of business for the Enterprises exceeds $5 trillion and that their combined multifamily book is approximately $650 billion. These figures provide a sense of the vast scale at which these Enterprises operate within the housing finance system. Such substantial holdings highlight both the potential impact of the Enterprises' failure on financial markets and the importance of creating resolution plans to minimize disruption.
Financial Planning and Market Assumptions
The proposed rules stress that Fannie Mae and Freddie Mac must develop resolution plans under the assumption that no extraordinary financial support from the U.S. government will be available in distress scenarios. This is meant to enhance market discipline but could result in conservative financial planning. Such conservatism might affect the broader market dynamics, possibly leading to tighter credit availability or influencing investment decisions based on perceptions of increased risk.
Concerns About Costs and Administrative Burden
Another financial aspect concerns the potential costs and resource allocation required by Fannie Mae and Freddie Mac to comply with the proposed regulations. The rules imply complex processes that could translate into high administrative costs. Smaller entities, in particular, may struggle with the demands of creating detailed resolution plans, potentially diverting resources from other operational priorities.
Recommendations on Transparency vs. Confidentiality
While financial transparency is essential, the document brings forward a critical tension between public access to financial information and maintaining confidentiality. The guidance proposes making the "public section" of resolution plans accessible but leaves open which specific financial details should be public. This balance is crucial to ensure transparency does not undermine competitive or sensitive information protection, which presents a challenge not fully addressed in the framework.
Overall, the financial references in the document illustrate the significant government involvement with Fannie Mae and Freddie Mac, the large scale of their financial operations, and the intricacies involved in developing a robust framework to ensure financial stability without excessive government intervention.
Issues
• The document is very detailed and lengthy, which may inhibit understanding for some stakeholders who are affected by the proposed rule.
• The description of what constitutes a 'credible' resolution plan is complex and might not be easily understandable without professional financial or legal expertise.
• Many points involve technical financial terms and legal references (e.g., 'DFA section 165 rule,' 'FDIC IDI rule') that require significant background knowledge to fully grasp.
• The requirement for Enterprises to make assumptions that no extraordinary support from the U.S. government will be available could lead to overly conservative planning, potentially affecting market dynamics.
• The public section of the resolution plan would need careful consideration to decide what specific information should be accessible without compromising any sensitive information. However, there's a tension between transparency and confidentiality which is not fully resolved in the document.
• There is an implication of complex processes and procedures for Enterprises, which might involve significant administrative costs and resources to comply with.
• The timelines for different components (identification of core business lines, resolution plans, interim updates) might place heavy demands on the organizations, especially smaller entities, affecting their operational focus.
• The mention of 'potential impediments to resolution' and required remedial actions could be interpreted as overly burdensome regulatory requirements.
• The allowances for FHFA's discretion in various processes could lead to inconsistent applications or subjective determinations that may impact fairness or transparency.
• The rule's overlap with other regulatory frameworks is noted but not fully resolved, which might lead to redundancies or conflicting requirements.